Naming and shaming tax evaders

HMRC has recently updated its published list of deliberate tax defaulters. The list is supposed to spotlight bad behaviour and discourage taxpayers from breaking the rules, but does it work?

Expectation gap

When reading a list of tax evaders you might expect it to be full of wealthy individuals involved in artificial tax schemes, or big companies using complicated arrangements to reduce taxable profits. The reality seems very different. The most common descriptions in HMRC’s published list of offenders are builders and takeaways, suggesting such businesses are perhaps under-declaring cash takings.

This begs plenty of questions. Are tax evaders really limited mainly to small cash-based businesses? Is HMRC ignoring the big cases? Does naming and shaming work as a strategy at all?

It is hard to imagine that when Parliament gave HMRC powers to publish details of tax defaulters, those powers were intended to concentrate on labourers, craftspeople and fast food business owners. It is also hard to believe that the threat of being seen listed on an HMRC website by their customers is going to be enough to deter a hairdresser or property rental business, for example, from breaking the law in this way. If these are the types of cases mainly caught by the naming and shaming system, it suggests that the system is broken.

Of course, taxpayers who are put off breaking the law by the fear of being named and shamed do not appear on the list, so perhaps the system is working well for some sectors. The fear of publicity is definitely a factor for some taxpayers who ask for professional advice in coming clean with HMRC. But would a sophisticated and determined evader really be put off by a list that includes nobody else like them?

Tax gap

The 2021 UK tax gap, published by HMRC on 23 June 2022, was 5.1 per cent of expected tax liabilities, unchanged from the previous year. This is the shortfall between how much tax was actually paid compared to HMRC’s estimate of how much should have been paid in the year, and it has fallen from 7.5 per cent in 2006, suggesting HMRC has made modest progress over the last 15 years.

The fact that the names on the defaulters list largely seem to relate to cash-based businesses suggests that HMRC is still concentrating on tackling the same sort of tax evasion that has gone on for years. This is clearly important, but does it also suggest a lack of imagination or willingness to go after more difficult cases?

Maybe not. Inclusion on the defaulters list is (sensibly) limited to tightly defined circumstances. To be included, the taxpayer must have engaged in deliberate attempts to evade tax and must have been charged a penalty for deliberate default involving tax of more than £25,000. Information will not be published where the taxpayer has fully cooperated with HMRC by providing full disclosure during its investigation. It can be hard to prove that actions were deliberate rather than, say, negligent and it will often not be worth HMRC making the extra effort to do so. Taxpayers who are well advised will also be strongly encouraged to cooperate with HMRC fully, thereby reducing the risk of publicity.

The limited scope of naming and shaming begs the question of whether the rules are fit for purpose, but the updating of the list is a timely reminder of its existence. As HMRC redoubles its efforts to collect as much tax revenue as possible, it would not be a surprise to see changes being proposed to the law that would allow HMRC to use the list more widely. Anyone whose tax affairs are not in order and who does not want the world to know about it should act now to protect themselves.

For more information, please get in touch with Andrew Robins or your usual RSM contact.